Points for even lower rate?

[giggles]

We have a mortgage offer of 3.5%.  I am satisfied with this rate, but I was really tempted by the idea of buying 2 points for roughly $5000.  We would save about $880 per year on the mortgage, for a total savings of about $21,000 over the life of the loan.  We are planning to pay off the mortgage early, but this is super tempting for me.  My husband and our parents don't like the idea of points, since the rate is already so low.

Am I over thinking this?  We are going to lock in on Thursday. 

[icefr]

It would take $5,000/$880/year = 5.68 years to recoup the costs of these points. Do you think that you will stay in the house for more than 5.68 years without refinancing the loan at all?

[Hamster]

I probably wouldn't. It will save you $21000 over 30 years if you keep the loan for 30 years. But, you want to pay it down sooner making it less attractive. It could also cost you money if you move, refinance, or pay it off in under 5.5 years. You also have the lost opportunity cost of that $5k. For example, $5000 in an index fund earning 7% per year will earn you $33000 over that same 30 years.

[Nords]

Am I over thinking this?  We are going to lock in on Thursday.

Over the last decade, we've reduced our interest rates with points a couple times.  Each time they've paid for themselves.  Now after our last refi we're reluctant to refi again at these rock-bottom rates because we're already waiting until 2016 for the payback on this one.  But at 3.625% for 30 years, this mortgage may last longer than I do.

Like the other posters have pointed out, it's all about the payback for the savings.

[sdp]

2 super important questions for you.... what would you be doing with the 5,000 if you didn't buy the points?  would it yield more or less in an alternative investment?  What is your prepayment schedule? with these specific numbers we can do a comparison for you.....
Cheers,
Scott

[giggles]

We decided to forgo the points and stick with the 3.5%.  We have a bi-weekly payment schedule set up.  We decided to keep the $5000 we would have spent on the points in our Vanguard funds working for us, since our ROI has been beating the 3.5% now.  We won't be closing until July, so after then I should have good idea of how much running the hosue will cost us, and thus how much we will have left over for saving and paying down the mortgage. 

I ran a couple of different plan in excel.  I will try to post them when I get home...

[Hamster]

We decided to keep the $5000 we would have spent on the points in our Vanguard funds working for us, since our ROI has been beating the 3.5% now.  

I agree that you made a good decision, but the question is not what your ROI has been, but what you expect for future returns. If this were February of 2009, and your stocks in Vanguard had been just fallen precipitously over the last year, it still would have been a good decision (in fact a fantastic decision) to keep them in a total market fund in Vanguard instead of paying points to lower your mortgage interest.

[Mr Mark]

I probably wouldn't. It will save you $21000 over 30 years if you keep the loan for 30 years. But, you want to pay it down sooner making it less attractive. It could also cost you money if you move, refinance, or pay it off in under 5.5 years. You also have the lost opportunity cost of that $5k. For example, $5000 in an index fund earning 7% per year will earn you $33000 over that same 30 years.

Exactly (at least the last part. I disagree that it would save 21k). It is tempting to do the simple analysis of the OP, that apparent future saving , when the correct way is to consider 2 different cashflow forecasts, one with, and one without, the decision to buy a lower fixed rate, with a range of assumptions. This way you include opportunity cost of capital, taxes, etc.

ie. On top of that, the rate could drop, meaning you could have refinanced at the rate you purchased for free. It's a one-sided bet. And an expensive one. Even when you "win", you loose money and give fat fees to everyone as a result.